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Long Term Care Insurance: Definition, Costs, and Policy Details

Long term care (LTC) insurance coverage is a product that provides Americans the means to fund the long term care services that they need whether in their elder years, during an illness, or after an accident.

As many households may be aware, LTC services in the United States are sky-rocketing to unaffordable prices. So many people are struggling to meet their care demands because the expenses are simply too much to afford without outside help. In these circumstances, many are forced to rely on their value of their assets and savings, which may or may not be enough. Should they outlive their savings, older adults find themselves relying on their children for the physical care and financial support. This then creates a cycle of generations providing care and then subsequently needing care in the future.

It is a potentially devastating situation to be in, especially if not handled and prepared for correctly. As discussed in our previous post, A Detailed Guide to Buying Long Term Care Insurance, securing this type of coverage requires a great deal of work from the person’s end.

Long Term Care Costs

Perhaps, the biggest issue that many people have with LTC is the cost of its services. According to the Urban Institute and the US Department of Health and Human Services, the average cost of LTC is $138,000. The amount, however, depends on the type of services required and the duration of the actual care. For some health conditions that require years or even decades of care, such as Alzheimer’s disease, these costs can reach immense amounts.

To get a better view of how much LTC services cost financially, here is a breakdown of the annual prices through the Cost of Care Survey released by Genworth last year:

Bear in mind that these figures are simply the average. In some states, these costs can go up to hundreds of thousands of dollars. Various online articles point to Alaska, Connecticut, and Massachusetts as the expensive states for long term care. The most pocket-friendly states listed online are Louisiana, Alabama, and Missouri.

Moreover, the cost of LTC is not just financial. Because of the lack of resources of older individuals to pay for these services, they end up relying on their loved ones for the care. When this situation happens, their family members and loved ones face the emotional, social, mental, and physical costs that come with providing care. They become part of what is now known as The Sandwich Generation or the group of individuals stuck between caring for aging or ill loved ones and raising their own children. They end up paying thousands of dollars for out-of-pocket costs related to LTC, which means that they barely have enough to cover their needs and prepare for their own futures.

Without long term care insurance, people facing care risk beginning this cycle that affects multiple generations in their own families.

The Basics: the 5 Ws of Long Term Care Insurance

As mentioned earlier, LTC insurance provides the coverage that people need to face these sky-rocketing costs. Let us explore its various aspects to get a better understanding of how it works and how it can help:

What is LTC insurance?

As defined on the NIHSeniorHealth website, LTC insurance is a policy that covers the LTC expenses accrued by an individual. Policyholders pay premiums that are based on the whether they might have illnesses or health conditions that could require LTC services but not shorten life spans.

Individuals who purchase LTC insurance policies are those who wish to protect their assets, savings, resources, and family members from the potentially devastating costs.

Who needs coverage?

The majority of LTC recipients are in their twilight years, which is why these services are typically associated with those who belong to the older generations. Moreover, studies have cited that 70% of individuals turning 65 can expect to require LTC in the following years.

Although the duration often varies, the average years of care that people need are as follows:

Without LTC coverage, individuals would have to cover the costs by other means for a number of years.

When is the best time to plan for and purchase a policy?

Industry experts have always been adamant that the best time to purchase a policy is when the person is young and healthy. This is because insurance providers value these two traits in their potential policyholders. Individuals who fit the bill can get various discounts such as good health discount which some companies offer up to 10%.

Moreover, buying young and healthy means lower premiums. A person who purchases an LTC insurance policy at 40 or 50 will pay lower premiums than those who buy in their late sixties. As people often drop their LTC insurance policies because of the high premiums, this strategy could help individuals in keeping their coverage.

Where can I get a policy?

Finding a reliable provider for investments as big as LTC insurance is absolutely vital. Individuals must take the time to do research on insurance carriers to determine their stability and dependability.

Purchase LTC insurance policies from reputable companies and providers. Consult different insurer rating agencies, like Moody’s, AM Best, and Fitch Ratings, to determine how insurers are doing in the industry.

Why is long term care insurance a good option?

This type of insurance is specifically engineered to address the growing problem that American have with LTC. It provides the comprehensive coverage that Americans need to accommodate the costs of care in the country.

Risk Factors and Considerations

Admittedly, LTC insurance policies are not for everyone. Many find the costs too expensive, which is why they choose to rely on other programs that may help. To help individuals decide whether this type of insurance is the better option, here are risk factors and consideration to take note of:

Personal Risk Factors

Life expectancy – longevity is a big issue among individuals seeking LTC because the longer a person lives, the higher the chances of needing LTC gets. Look into lifestyle and family history to get a better picture.

Gender – As indicated above, women tend to need LTC services longer than men. Moreover, women often end up facing the high costs without a partner after years of providing care to a spouse. This is why having an LTC policy is vital for women today.

Family health history – Families may have a number of health conditions and illnesses that require LTC. Researching on family health history may help individuals determine the chances of needing LTC in the future.

Financial Considerations

Assets – One of the main reasons people get insured for LTC is because they want to protect their assets from the costs. Individuals ought to examine how much they have, and how much they are willing to sacrifice to pay for the costs of care.

Affordability of the Policy – Examine the stability of income. Can the current income sustain years of paying for premiums? Will other assets and savings be used to pay for this coverage? Bear in mind, as well, that these costs can go up in a few years.

Retirement – Can these costs be sustained even during retirement? Bear in mind that the years after retirement may mean limited income. Of course, this depends on the person’s lifestyle. After all, other people choose to continue working after turning 65 while others find other income-generating ventures.

Understanding Insurance Policies

Listed below are key features that can change a policy’s coverage:

LTC Insurance Riders

LTC policy riders help individuals customize their plans to fit their needs and budget. However, these features may mean paying for more dollars. This is why people are advised to choose the ones they will most likely need. After all, overloading a policy may look comprehensive, but it can be too costly to maintain. Indicated below are three LTC insurance riders that many consider most beneficial:

Inflation Protection

Many individuals view this rider as an absolute must when purchasing a policy, despite the chances of it increasing premiums. The three types are as follows:

Future Purchase/Guarantee Purchase Option – This allows policyholders to increase their daily benefit amount every two to three years without having to meet additional underwriting. However, this may be expensive because each new offer is based on the policyholder’s current age. Insurers may also stop offering this option after two to three tries.

Simple Inflation – This increases the daily benefit by 5% every year. By the 19th year and a half, a policyholder’s daily benefits will have doubled. However, as this type is typically included in the premium prices, the costs will increase by 40% to 60%.

Compound Inflation – This type increases the daily benefit by 3% to 5%, compounded annually. Experts have cited that this is more beneficial to younger and healthier individuals.

Cash Benefit

This rider is advantageous to people who wish to receive care at home. This is because this feature allows them to receive their cash benefit on a daily basis, regardless of whether they received care that day or not. It also entails that the coverage starts once one hour of care is used.

Moreover, people receiving care from loved ones can benefit from this because they do not need to provide the bills after eligibility is established. This means that care recipients can use the money to pay for services provided by family caregivers.

Shared Care

Couples typically require two expensive plans to ensure that both individuals are covered. Naturally, this is worrisome, especially with the way the costs have been increasing over the years. In fact, studies show that approximately 25% of couples age 65 can expect to spend half a million on LTC services.

The shared care feature in LTC insurance policies allows couples—married or not—access to coverage that is enough for two individuals. This means that through this rider, couples get to combine their benefits into a pool which they can both have access to. So, for example, if both individuals have three years worth of coverage, they have six years between the two of them.

Reimbursement vs. Indemnity

LTC insurance policies may pay the services through two methods. On the one hand, reimbursement policies pay benefits based on the services and expenses used. This means that policyholders typically pay for the services first, and then the policy, as the name implies, will reimburse the amount later on. On the other hand, indemnity policies pay a set amount, regardless of the actual expenses accrued.

Policy Exclusions

As cited by the Texas Department of Insurance Website, LTC insurance coverage may be withheld if the person needs the services because conditions that result from the following:

Alcoholism or drug addiction

Attempted suicide or self-inflicted injuries

Participation in a riot, felony, or insurrection

War or an act of war, declared or undeclared

Service in the Armed Forces

Aviation activities, if the person was not a fare-paying passenger

Alternatives to Long Term Care Insurance

Other options are available to those who choose not to purchase an LTC policy. However, people considering these options must be aware of what they exactly do before deciding.

Medicaid and Medicare

Many turn to government-funded programs, like Medicare and Medicaid, for the care services that they need. However, Medicare does not cover most LTC services. Instead, it pays for some part-time services for individuals who are homebound as well as for those who require short-term skilled care. It may also cover the first 100 days at a nursing home facility.

Medicare pays for LTC services. However, as this program is catered to people with limited income, it enforces certain financial and health requirements that individuals must meet to qualify. Some have had to spend down their assets in order to be eligible for coverage.

Self-Insurance

This type of coverage is when individuals use their own savings and assets to fund any care services they might use in the future. The most appealing aspect of this strategy is that people who choose to self-insure do not have premiums to pay. However, planning to pay out-of-pocket is a big risk to take, and any miscalculations can lead to losing a great deal of money.

Reverse Mortgage

This strategy allows older individuals to convert part of the ownership of their house into cash. They get to remain in their own homes, and they do not need to repay the loan until they sell the house, no longer use it as the main residence, or pass on.

Hybrid Life Insurance Policies

Life insurance policies offer riders that pay out for disabilities, LTC, critical illnesses, and chronic health conditions. However, the premiums for these plans may be unaffordable because these are typically paid over shorter periods than LTC insurance policies.

Annuities

Insurance companies may also offer annuities to help pay for LTC services. Individuals pay a company, whether in one go or through a series of payments. The company then provides a single payment or a series of payments over a specific and defined period.

Remember: Shop Around First

According to Women’s Health Care Tab in Retirement: $79,000 More Than Men’s, a post by Time.com, 75% of older individuals point to the expensive costs of care as one of their top fears in retirement.

This is why finding coverage is a must, but diving headfirst might be counterintuitive to the goal of finding good coverage for LTC. People are often advised to shop first to see the available options in the market. The best way to do so is to request long term care quotes that are often offered online. Compare the prices offered as well as the coverage details indicated.

Moreover, individuals looking into purchasing an LTC insurance policy must be sure to discuss the details with insurance policy specialists. This way, the veterans in the business can answer any questions and clarify any confusion.

Free Ebook: Download the extended version today. This includes the questions you need to ask about LTC insurance, important shopping tips, and a list of terms you need to know to navigate the world of LTC coverage.

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The Association for Long Term Care Planning provides free long term care information, resources and expert planning advice for seniors and adults. Our mission is to raise awareness and promote self-education on the need to plan for long term care.